Paul Ferraresi

Oftentimes, when a person does not prepare adequately for retirement funding, they consider using a reverse mortgage just to exist.

Assume a retiree’s home is paid off. They can go to a bank and obtain a reverse mortgage loan against the property. Depending on the person’s age, their health, and the property value, the lender will provide funding to the retiree. The amount may be, say, 50% of the appraised value of the property. There are no payments due to the bank. The principal and interest accrue. Once the person dies, the bank will take the property and sell it. The outstanding mortgage may be 80-90% of the home’s value at the person’s death, so, the bank can still make some money once it sells the home. On the other hand, the surviving spouse or heirs could pay off the loan and take ownership.

A recent article in the September 2011 issue of Investment Advisor magazine showed AARP suing Fannie Mae and Wells Fargo over reverse mortgages.

HUD had established original rules that “…a borrower or heir would never pay more than the home was worth at the time of repayment.” In 2008 HUD changed the rules…. The heir must pay the full mortgage amount even if it exceeded the value of the home. AARP sued and HUD returned to the original rules.

A new suit has come up, by AARP, toward Fannie Mae and Wells Fargo. These institutions are failing to give notice to surviving spouses and heirs of their rights to buy the property for the lower value. These institutions are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.

Thus, a stranger could purchase a reverse mortgage home for the fair market value where an heir could not.

A simple solution to not getting caught in this trap is to start early funding for your retirement. Sit down with a Certified Financial Planner no later than your early thirties to get a plan in place to actively fund your plan. Day after day I have a large number of people, around the age of 58, who earn $100,000 per year or more, and have less than $50,000 saved for retirement, call into the office, looking for a quick solution. With only $50,000 that will fund the first six months of their retirement. Sad….

As always, discipline or regret.

(Here is an excerpt from the September 19, 2011 issue of Barron’s Magazine. It is a sobering article written by Frederick G. Marks, co-founder of Cheviot Value Management in Santa Monica, CA. I suggest you go online to read the entire article.)

Medicare provides open-ended, unfunded promises to pay benefits, bank-rolled partly by a dedicated payroll tax and mostly by general-fund taxes and borrowing.

In contrast, insurance companies employ actuaries and underwriters to estimate future expenses and charge appropriate premiums to ensure that money is available to provide the benefits promised.

But in Medicare, the insurers are the taxpayers, with the government administering the program. Medicare has no assets other than future obligations of taxpayers. Medicare’s trustees report that the program faces $38 trillion in unfunded future liabilities ($330,000 per U.S. household).

Medicare’s dire financial condition is due to its design and operation. Medicare payroll taxes are far too low to fund the benefits promised. And fraudulent claims account for 20% to 30% of Medicare expenditures. Medicare’s payment methods allow abuse by way of repeated charges for unnecessary procedures and supplies. Private insurance companies experience far lower losses from fraud and abuse.

Cutting payments to hospitals and physicians is no solution for the financial woes of Medicare. The program already pays less than the costs of hospitals and many physicians — who then try to shift the unreimbursed costs to privately insured patients. That is one of the major causes for the alarming escalation in the price of private insurance, which has been rising 12% a year. Many physicians refuse to accept new patients if they are on Medicare. Cutting payments to physicians will further limit access to their services.

Medicare specifies 467 medical conditions for which it will pay. Unfortunately, Medicare doesn’t allow much payment for a primary-care physician spending quality time with a patient to evaluate his condition, decide on treatment, or make appropriate referrals to specialists.

Insurance companies and Medicaid follow Medicare’s lead. Consequently, primary-care physicians earn about half the average for other physicians, and they work about 80 hours a week. No wonder the number of primary-care physicians is shrinking, as they leave that field in order to retrain in a specialty or to retire early….

According to advice to the U.S. government from the International Monetary Fund, Medicare benefits cannot be paid over the long-term future unless benefits are cut in half or taxes are doubled. Such benefit cuts would greatly damage health care for senior citizens and such a tax increase would thrust an unsupportable burden on younger people.
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Better prepare to pay substantially more healthcare costs out-of-pocket for yourself and your parents.

During my 40 years of practice, I see people under-estimating what they will need in retirement. Aside from the vast text book education I have acquired over the years in this area, I also have had first-hand experience with thousands of my clients who have retired.

I hear people say, “Paul, I feel that we will need only about 75% of our current income to retire.” The actual national average is 91-94% with many spending 103-105% of their final year’s pay. For some reason people leave out a factor for income taxes (which are set to rise in a little over a year) and inflation. That is why they think they only use 75%.

Here is the real item they have left out – health care costs. An average married couple with children pays approximately $300-400 per month for health care. The “street” cost for a Blue Cross/Blue Shield policy is around $1400 per month. That means, your company is making up the difference. (Say Thank You!) Group health insurance has been set up on a socialistic system. That is, the young and healthy workers are paying for the older, less healthy individuals in your company.

If you want “good” health care when you retire, you probably will not go with Medicare. By the way, watch for the bankrupt Medicare system to raise rates and cut benefits shortly in order to survive. (Ah yes, another government program that does not work.) At age 65, a married couple with a private health plan can expect to pay $2000 to $2500 per month with a $2500 deductible. That is $24,000-30,000 per year for the insurance plus the deductible and out-of-pocket costs for medications. Did you add that into your budget for retirement? I think not! So, a couple now earning $100k per year, guesses they will only need $75k. Gross up to pay for taxes and they are up to $95k to $100k. Then add in the new health care costs, more travel and gifts for grandchildren. It is not unreasonable for them to need over $100k.

Most people probably will take Medicare. You know – where the government says it will take care of you. (One of my favorite quotes is: Be careful of those who want to take care of you…for your caretaker will soon become your jailer!) The quality and quantity of service is lacking, to say the least.

Another thing to add to your retirement budget will be long-term care coverage. If you have not started the purchase of this coverage, well, it gets real expensive starting at age 55-60. Oh, you say, you will pay for it on your own instead of buying the insurance. Costs today for care in a nursing home or at-home care averages $6,000-10,000 per month ($72,000-120,000 per year). Remember, a married couple can expect one of the two people to need nursing home services for at least five years. (That is $360,000 to $600,000.) Today’s costs can wipe out your finances. Where will it come from as people are living longer? These costs are going up at a rate of 15-20% per year.

Stop putting your head in the sand and develop a plan for you and maybe your parents, also. Unfortunately, most Americans have been brainwashed to not take responsibility for themselves. Sit down with a professional advisor, face the truth, and get to work on providing a comfortable future for yourselves.

Discipline or regret.

The Fed stopped the QE2 program on June 30, 2011. The whole purpose was to provide liquidity to the Treasury market and to appease the Chinese who hold the greatest amount of Treasury debt. The Chinese were concerned that no one would buy their holdings.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

The masterminds that conceived this plan were brilliant. The strategies used were simple…prey upon your fear and greed. You, as the “investor”, continue to be given fraudulent explanations, and, unfortunately, continue to invest.

Here is how it works. You invest a small amount of money over time. Eventually, you can start withdrawing the money. You will get your full investment back, in anywhere from 14 months to 60 months. The money will come back to you tax-free for as long as you live. Once you die, your spouse will get about one half of your payments until they die.

Sound too good to be true? Sounds like a Bernie Madoff pitch, or an overseas scam, or a Ponzi scheme???

Oh, there are a few other factors…you must make this investment for every day you work, it is dependent on new investors coming in every year, the plan sponsor has no liability if things do not work out, the plan sponsor can add new beneficiaries at any time, the plan sponsor can change the rules, including raising your required investment and making a portion of the benefit payment taxable. Most importantly, you cannot get out of the required investment. Upon investigation, you will find there is no money in the plan. They promised you they would put it in a “lock box”. The administrators have taken all the money out and spent it without your permission. There is only an “IOU” in the box that your neighbors, you, your children and grandchildren must pay back.

Are you getting interested, or, ready to walk away? Is this investment something you would place your hard earned money into?

Well, this “investment” you make is our Social Security system. If any Wall Street money manager offered this deal, they would be cellmates with Bernie Madoff. Yet, your representatives in Washington have been doing this to you for almost 70 years. Ah, yes….the failure of government programs. Any private pension plan that was set up this way would have the administrators put away for life.

The purpose of my essay is to have you plan now for the following:

(1) If you are 55 or older, you probably will get your “promised” benefits if you live a normal life expectancy. Expect 100%, not 85%, of the benefits to be fully taxable in the future.

(2) Social Security will be “means” tested. Thus, those at or somewhat above the poverty level, most likely, will get their benefits. Anyone above the “means” test number will not get the benefits, or, be excessively taxed, including penalties.

(3) For those under 55, do not count on Social Security as part of your retirement. Take aggressive action now to build your own retirement funding. Consider a non-qualified plan that can provide tax-free benefits, in the future, for you.

(4) Try to set up a “side business” now, even as you work full-time, so you can maximize amounts set aside for retirement to replace your “expected” social security benefits. Remember, you work from age 25 to 65 to accumulate enough money to live from age 65 to 105.

(5) Keep in mind if you save 10% of your gross income from age 25 to age 65, and assuming a 0% rate of return, you will have enough capital to live for four (4) years after you retire. At a 25% savings rate, (same 0% return), you will have 10 years of retirement capital. (Don’t laugh at 0% return. Most people are saving for retirement accounts in money market accounts, CD’s, and T bills. They are paying about ½ of 1% interest, less taxes and inflation….so your return is about negative 3% with a depreciating dollar.)

See your advisor today to get a plan in place.

Discipline or Regret!

“The grass may look greener on the other side but it still has to be mowed.”